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Severance Pay and the Shadow of the Law: Evidence for West Germany

  • Laszlo Goerke
  • Markus Pannenberg

Due to the complexity of employment protection legislation (EPL) in Germany, there is notable uncertainty about the outcomes of dismissal conflicts. In this study we focus on severance pay and inquire whether its incidence and level varies in a systematic manner with the legal rules as defined by labour as well as tax law. We start with a theoretical model that generates the main observable outcomes of dismissal conflicts as potential equilibrium situations. Using German panel data (GSOEP), we put our theoretical model to an empirical test. Our main result is that the shadow of the law matters. Criteria regarding the validity of dismissals either found in respective legislation or defined by labour courts significantly affect the incidence and magnitude of severance pay. Moreover, restrictive changes in the taxation of severance pay have a negative causal impact on its incidence.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1619.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1619
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  1. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, June.
  2. Frick, Bernd & Schneider, Martin, 1999. "Zunehmende Konfliktregulierung durch Arbeitsgerichte? Eine ökonomische Analyse der Häufigkeit von Kündigungsschutzprozessen," Quint-Essenzen 56, Institute for Labour Law and Industrial Relations in the European Community (IAAEG), University of Trier.
  3. Richard Blundell & Monica Costa Dias, 2009. "Alternative Approaches to Evaluation in Empirical Microeconomics," Journal of Human Resources, University of Wisconsin Press, vol. 44(3).
  4. Bauer, Thomas K. & Bender, Stefan & Bonin, Holger, 2004. "Dismissal Protection and Worker Flows in Small Establishments," IZA Discussion Papers 1105, Institute for the Study of Labor (IZA).
  5. Jeffrey M. Wooldridge, 2004. "Inverse probability weighted estimation for general missing data problems," CeMMAP working papers CWP05/04, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. Addison, John T. & Bellmann, Lutz & Schnabel, Claus & Wagner, Joachim, 2002. "German Works Councils Old and New: Incidence, Coverage and Determinants," IZA Discussion Papers 495, Institute for the Study of Labor (IZA).
  7. Jeffrey M. Wooldridge, 2002. "Inverse probability weighted M-estimators for sample selection, attrition and stratification," CeMMAP working papers CWP11/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  8. Miguel �. Malo, 2000. "A Simple Model of Severance Pay Determination: The Case of Individual Dismissals in Spain," LABOUR, CEIS, vol. 14(2), pages 269-290, 06.
  9. Ichino, Andrea & Polo, Michele & Rettore, Enrico, 2003. "Are judges biased by labor market conditions?," European Economic Review, Elsevier, vol. 47(5), pages 913-944, October.
  10. repec:iza:izadps:dp875 is not listed on IDEAS
  11. Jeffrey M. Wooldridge, 1999. "Asymptotic Properties of Weighted M-Estimators for Variable Probability Samples," Econometrica, Econometric Society, vol. 67(6), pages 1385-1406, November.
  12. Duan, Naihua, et al, 1983. "A Comparison of Alternative Models for the Demand for Medical Care," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 115-26, April.
  13. E. Galdon-Sanchez, Jose & Guell, Maia, 2003. "Dismissal conflicts and unemployment," European Economic Review, Elsevier, vol. 47(2), pages 323-335, April.
  14. Levine, David I, 1991. "Just-Cause Employment Policies in the Presence of Worker Adverse Selection," Journal of Labor Economics, University of Chicago Press, vol. 9(3), pages 294-305, July.
  15. Verick, Sher, 2004. "Threshold Effects of Dismissal Protection Legislation in Germany," IZA Discussion Papers 991, Institute for the Study of Labor (IZA).
  16. Levine, David I, 1989. "Just-Cause Employment Policies When Unemployment Is a Worker Discipline Device," American Economic Review, American Economic Association, vol. 79(4), pages 902-05, September.
  17. Christian Grund, 2006. "Severance payments for dismissed employees in Germany," European Journal of Law and Economics, Springer, vol. 22(1), pages 49-71, July.
  18. Heiner Heseler & Ulrich Mückenberger*, 1999. "The Management of Redundancies in Europe: The Case of Germany," LABOUR, CEIS, vol. 13(1), pages 183-235, 03.
  19. Riphahn, Regina T., 2004. "Employment protection and effort among German employees," Economics Letters, Elsevier, vol. 85(3), pages 353-357, December.
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